CHARLESTON, S.C. – The following is an excerpt from the remarks
Monday of Federal Reserve Chairman Ben Bernanke, prepared for the
Southern Legislative Conference:
The Economic Outlook
After a precipitous decline in late 2008 and early 2009, the U.S.
economy stabilized in the middle of last year and is now expanding at a
moderate pace. While the support to economic activity from stimulative
fiscal policies and firms’ restocking of their inventories will diminish
over time, rising demand from households and businesses should help
sustain growth. In particular, in the household sector, growth in real
consumer spending seems likely to pick up in coming quarters from
its recent modest pace, supported by gains in income and improving
credit conditions. In the business sector, investment in equipment and
software has been increasing rapidly, in part as a result of the
deferral of capital outlays during the downturn and the need of many
businesses to replace aging equipment. At the same time, rising U.S.
exports, reflecting the expansion of the global economy and the recovery
of world trade, have helped foster growth in the U.S. manufacturing
sector.
To be sure, notable restraints on the recovery persist. The housing
market has remained weak, with the overhang of vacant or foreclosed
houses weighing on home prices and new construction. Similarly, poor
economic fundamentals and tight credit are holding back investment in
nonresidential structures, such as office buildings, hotels, and
shopping malls.
Importantly, the slow recovery in the labor market and the
attendant uncertainty about job prospects are weighing on household
confidence and spending. After two years of job losses, private payrolls
expanded at an average of about 100,000 per month during the first half
of this year, an improvement but still a pace insufficient to reduce the
unemployment rate materially. In all likelihood, significant time will
be required to restore the nearly 8-1/2 million jobs that were lost over
2008 and 2009. Moreover, nearly half of the unemployed have been out of
work for longer than six months. Long-term unemployment not only imposes
exceptional near-term hardships on workers and their families, it also
erodes skills and may have long-lasting effects on workers’ employment
and earnings prospects.
Financial conditions — though much improved since the depth of the
financial crisis — have become somewhat less supportive of economic
growth in recent months. Notably, concerns about the ability of Greece
and a number of other euro-area countries to manage their sizable budget
deficits and high levels of public debt roiled global financial markets
in the spring, including our own. In response to these fiscal pressures,
European leaders put in place a number of strong measures, including an
assistance package for Greece and backstop financing for euro-area
countries. And, recently, European banking supervisors released the
results of comprehensive stress tests of their banks.1 On net, these
measures appear to have reduced concerns in financial markets about
European prospects.
Like financial conditions generally, the state of the U.S. banking
system has also improved significantly since the worst of the crisis.
Loss rates on most types of loans seem to be peaking, and, in the
aggregate, bank capital ratios have risen to new highs. However, many
banks continue to have a large volume of troubled loans, and bank
lending standards remain tight. With credit demand weak and with banks
writing down problem credits, bank loans outstanding have continued to
decline. Small businesses, which depend importantly on bank credit, have
been particularly hard hit by restrictive lending standards. At the
Federal Reserve, we have been working to facilitate the flow of funds to
creditworthy small businesses. Along with the other banking supervisors,
we have emphasized to banks and examiners that lenders should do all
they can to meet the needs of creditworthy borrowers, including small
businesses.2 We also have conducted extensive training of our bank
examiners, with the message that lending to viable small businesses is
good for the safety and soundness of our banking system as well as for
our economy. We will continue to monitor bank lending and to seek
feedback from banks and borrowers.
Inflation has been low, with consumer prices rising at an average
annual rate of about 1 percent in the first half of this year, and we
anticipate it will remain subdued over the next couple of years.3 Slack
in labor and product markets has damped wage and price pressures, and
rapid productivity increases have helped firms control their production
costs. Meanwhile, measures of expected inflation generally have remained
stable.
—
1. For information on the 2010 European Union stress testing, see
the Committee on European Banking Supervisors website at
www.c-ebs.org/EuWideStressTesting.aspx.
2. See Board of Governors of the Federal Reserve System, Federal
Deposit Insurance Corporation, National Credit Union Administration,
Office of the Comptroller of the Currency, Office of Thrift Supervision,
and Conference of State Bank Supervisors (2010), Regulators Issue
Statement on Lending to Creditworthy Small Businesses, joint press
release, February 5,
www.federalreserve.gov/newsevents/press/bcreg/20100205a.htm.
3. The discussion in the text refers to inflation as measured by
the price index for personal consumption expenditures.
** Market News International Charleston **
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